With a Little Help from My Friends: Debt Renegotiation and Climate Change

53 Pages Posted: 25 Oct 2021

See all articles by Juan-Camilo Cárdenas

Juan-Camilo Cárdenas

Universidad de Los Andes

Fernando Jaramillo

Universidad del Rosario - Faculty of Economics

Diana Leon

Universidad de los Andes, Colombia

María del Pilar López-Uribe

Universidad de los Andes, Colombia - Department of Economics

Mauricio Rodriguez

Universidad del Rosario

Hernando Zuleta

Universidad de los Andes, Colombia

Date Written: October 20, 2021

Abstract

The economic crisis from the Covid-19 pandemic has generated a fall in tax revenues and an increase in the need for public spending in most economies throughout the world. This situation has led to a substantial increase in the sovereign debt levels and has dramatically reduced the fiscal space of governments. For upper- middle-income countries (UMICs), current access to financing is limited and this can potentially limit the space for climate action in the short and medium run. However, delaying climate action can generate a negative signal on fiscal sustainability due to the physical and transition risks of climate change. Unsustainable production practices will result in a deterioration of the productive capacity of natural assets reducing potential tax income. Simultaneously there will be a stronger need for public spending to face the future damages associated to greenhouse gases emissions. Therefore, in order to address the current crisis, we need an integral approach that considers the climate crisis as a challenge with a high degree of urgency. For this approach to be feasible, sufficient international climate finance needs to be available, and it should help to steer relief and recovery efforts into a direction in which these are also compatible with climate targets. In this document, we propose a sovereign debt negotiation scheme in which the conditions of the debt depend on the climate policies undertaken by the debtor countries. Likewise, we point out that the feasibility of beneficial agreements for debtors and the implementation of good climate policies depend positively on the size of the debt and each country's potential to affect the current trend of climate change. For these reasons, the formation of coalitions of debtor countries can be a key factor for debt relief and the implementation of climate policies.

Keywords: Covid 19, Climate Change, Sovereign Debt, Coalitions, Climate Policy

JEL Classification: D62, D71, F34, G23, H63, Q50, Q54, Q58

Suggested Citation

Cárdenas, Juan-Camilo and Jaramillo, Fernando and Leon, Diana-Carolina and López-Uribe, María del Pilar and Rodriguez, Mauricio and Zuleta, Hernando, With a Little Help from My Friends: Debt Renegotiation and Climate Change (October 20, 2021). Documento CEDE No. 54, Available at SSRN: https://ssrn.com/abstract=3946664 or http://dx.doi.org/10.2139/ssrn.3946664

Juan-Camilo Cárdenas (Contact Author)

Universidad de Los Andes ( email )

Carrera 1a No. 18A-10
Santafe de Bogota, AA4976
Colombia
339-4949 ext. 2473 (Phone)

Fernando Jaramillo

Universidad del Rosario - Faculty of Economics ( email )

Casa Pedro Fermín
Calle 14 # 4-69
Bogota
Colombia

Diana-Carolina Leon

Universidad de los Andes, Colombia ( email )

Carrera Primera # 18A-12
Bogota, DC D.C. 110311
Colombia

María del Pilar López-Uribe

Universidad de los Andes, Colombia - Department of Economics ( email )

Carrera 1a No. 18A-10
Santafe de Bogota, AA4976
Colombia

Mauricio Rodriguez

Universidad del Rosario ( email )

Calle 12 No. 6-25
Bogota, DC
Colombia

Hernando Zuleta

Universidad de los Andes, Colombia ( email )

Carrera Primera # 18A-12
Bogota, DC D.C. 110311
Colombia

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